Next up: A Nobel prize in medicine for figuring out the best way to prolong your life while repeatedly shooting yourself in the head.
Next up: A Nobel prize in medicine for figuring out the best way to prolong your life while repeatedly shooting yourself in the head.
Paul Krugman offers a nice thought experiment to illustrate why government debt, in and of itself, does not make the country as a whole any poorer:
Suppose that … President Santorum passes a constitutional amendment requiring that from now on, each American whose name begins with the letters A through K will receive $5,000 a year from the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer?
The obvious answer is not, at least not in any direct sense. We’re just making a transfer from one group (the L through Zs) to another; total income isn’t changed. Now, you could argue that there are indirect costs because raising taxes distorts incentives. But that’s a very different story.
OK, you can see what’s coming: a debt inherited from the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds from their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer.
Paul Krugman gets this one exactly right; among the 47% of Americans who pay no federal income tax in a given year, most do pay federal income tax at some point in their lives — and thus have at least some stake in the tax system.
But even putting that aside, what’s particularly distressing about Mitt Romney’s “47%” speech is the failure to recognize at least one of the following two propositions:
a) Even people who never pay federal income tax have a substantial personal stake in a healthy, thriving economy, and therefore have a stake in federal tax policy. In particular, wages are determined by productivity, and productivity depends to a substantial extent on the accumulation of capital, which can be directly influenced by tax policy.
b) It is possible for a skilled candidate to explain the above, and to sell pro-growth tax policies as pro-wage-earner tax policies.
Yes, the candidate who tries to make such a reasoned case will be the victim of a certain amount of demagoguery about “trickle-down economics”, but the candidate who allows himself to be paralyzed by such threats should not be running for president.
What we’re supposed to infer, according to Krugman, is that
we have an election in which one candidate is proposing a redistribution from the top … downward, mainly to lower-income workers, while the other is proposing a large redistribution from the poor and the middle class to the top.
But no such thing is remotely true. What we actually have is an election in which both candidates are proposing massive redistributions from the top downward, one slightly less so than the other. You’d never know this from looking at Klein’s chart because it illustrates changes in rates, whereas what actually matters is the rates themselves. It makes no sense to ask whether any particular group ought to be paying more or less without reference to how much they’re already paying.
Indeed, this is a classic example of what I once called the “Grandfather Fallacy” — by focusing on changes instead of absolutes, Klein’s chart conceals any existing inequities and hence treats them as “grandfathered in”.
Fortunately, Greg Mankiw has provided the numbers that allow us to make the requisite correction. Here, according to Mankiw, are the current tax burdens on various income groups (counting transfers as negative taxes, as of course one should):
Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent
Top one percent: 28 percent
That “-301 percent” means, for example, that a typical family in the bottom quintile receives $3.01 in net transfers for every $1 that it earns.
By adding these numbers to the numbers in Klein’s graph, we can construct a picture that actually depicts something interesting, namely the projected tax burdens for each group. It looks like this (the vertical axis represents percentage of income):
Note, for example, that, contrary to the impression you might have gotten from Klein’s and Krugman’s posts, both plans place the highest percentage burden on the top 1%, and both plans place a negative burden on the middle quintile — though Obama’s does both of these things to an ever-so-slightly greater extent than Romney’s does. There’s room for disagreement about which plan is fairer, but no room, I think, for disagreement about which chart is relevant.
I’m a little frazzled this week, so I haven’t caught up with all the comments on Monday’s
post on immigration, but I know there’s been some discussion about the actual costs and benefits of admitting unskilled immigrants. I thought I’d supply some numbers that might inform that discussion; all of this is lifted from Chapter 20 of The Big Questions.
When an unskilled Mexican immigrant arrives in the United States, his wages typically rise from about $2 a hour to $9 an hour — call it a $7 an hour gain. He also bids down the wages of American workers by (and this is a high-end estimate from the labor economics literature) about $.00000003 per hour; multiply that by a hundred million American workers and you’ve got a collective $3 an hour loss.
Now there seems to be something like a consensus that it’s okay for US policies to benefit US citizens at the expense of Mexicans, but there also seems to be something like a consensus that there’s a limit to that; we would not want, for example, to allow Americans to hunt Mexicans for sport. So when we consider turning someone away at the border, one good question is: Are we willing to do $7 worth of harm to a Mexican in order to confer $3 worth of benefits on American workers?
Note that the potential Mexican immigrant is typically much poorer than those American workers, and that it’s not uncommonly argued that we should care more about the poor than about the rich. If you weight that $7 loss to the Mexican and that $3 gain to the Americans accordingly (i.e. assuming logarithmic utility, which is a quite conservative assumption — that is, one that biases the result in the anti-immigration direction), you discover exclusion hurts the Mexican about five times as much as it helps the Americans.
So, at least if you buy into that way of thinking (which pervades a lot of the policy literature) then exclusion is justified only if you “count” a Mexican as less than one-fifth of an American. That’s a pretty extreme position. It’s not as extreme as hunting Mexicans for sport, but it’s still pretty extreme.
Thanks to an election-year conversion by the President of the United States, 800,000 young people born outside the country will now be spared the threat of deportation. That’s a good thing. But let’s not lose sight of the fact that the biggest victims of American immigration policy are not the ones we deport; they’re the ones who never got to come here in the first place.
The President defends his new policy as humane. Put aside the question of where his humanity has been for the past three and a half years and ask yourself what’s so humane about protecting the children of relatively rich “illegals” (that is, the ones who have had the opportunity to earn American wages) while we continue to bar the door to their desperately impoverished cousins.
Regarding the beneficiaries of this new policy, the President says that
These are young people who study in our schools, they play in our neighborhoods, they’re friends with our kids, they pledge allegiance to our flag …
Why is any of this relevant? When did visibility become a criterion for moral status?
This is indeed a time to celebrate and I don’t want to diminish that. But I do have two questions for the President:
The birth control mandate strikes me as a very hard policy to defend, though I’ve done my part to put together the best possible arguments in its favor. For the record, I do think there’s a quite reasonable case to be made for some insurance mandates — primarily with regards to pre-existing conditions and catastrophic illnesses. (There’s also a very good case against those mandates, so don’t take this as an endorsement!). Those mandates at least address plausible market failures. A contraception mandate pretty clearly fails that test (though see the discussion at the linked post for some reasoned argument to the contrary).
So I believe the mandate is bad policy, both in its specifics and in its general presumption in favor of government power. If this isn’t unconstitutional, we need a better constitution. But that’s not the basis of Notre Dame’s lawsuit. Notre Dame’s position, as I understand it, is that Catholic institutions (as opposed to, say, General Electric) should be exempt from the mandate because religious objections (as opposed to, say, financial objections) have some kind of special exalted status. That strikes this non-lawyer as straying perilously close to a law respecting the establishment of religion. And if that’s not unconstitutional, then we really need a better constitution.
As long as we have anything like traditional marriage, I believe that restricting it to heterosexual couples is an exceptionally bad and stupid policy, laced with unnecessary cruelty. It is not, however, an issue that is likely ever to affect my vote, because so much else dwarfs its importance. Legalizing gay marriage would make life substantially better for a few million people of the wealthiest people in the world (i.e. Americans) and is therefore a good thing, but if I’m going to pick my battles, I’ll cast my lot with, say, the tens or hundreds of millions of Third Worlders who are relegated to dire poverty by American trade and immigration restrictions. I’ll take the homophobic free trader over the protectionist crusader for sexual equality every single time.
Paul Krugman on last week’s Supreme Court arguments:
I was struck, in particular, by the argument over whether requiring that state governments participate in an expansion of Medicaid … constituted unacceptable “coercion.” One would have thought that this claim was self-evidently absurd. After all, states are free to opt out of Medicaid if they choose; Medicaid’s “coercive” power comes only from the fact that the federal government provides aid to states that are willing to follow the program’s guidelines. If you offer to give me a lot of money, but only if I perform certain tasks, is that servitude?
Wrong question. The right question is:
If you take a lot of money from me and then offer to give it back, but only if I perform certain tasks, is that servitude?
Because, you see, the federal government is not handing out its own money to state governments — it’s handing out money that it takes from the citizens of those very states for the purpose of (conditionally) handing it back. (Of course “handing it back” isn’t exactly right either, because the payments go not to taxpayers but to their state governments — but it’s a lot closer to right than Krugman’s formulation.)
The Supreme Court has been a veritable festival of economic ignorance the past few days, but if I had to pick a prize specimen, I think it would be Paul Clement’s response to Justice Kennedy’s observation that the uninsured — given our unwillingness to turn them away from emergency rooms — impose a burden on the rest of us. Mr. Clement (the plaintiff’s attorney) tried to argue that the same is true in any market:
When I’m sitting in my house deciding whether to buy a car, I am causing the labor market in Detroit to go south…
thereby blurring the key distinction between a pecuniary and a non-pecuniary externality.
The point is that Mr. Clement’s decision not to buy a car (and therefore to drive down the price) is bad for Detroit auto workers only to the extent that it’s good for other car buyers. It is therefore in no sense a net burden on the rest of society. Contrast that with the clear burden imposed by the uninsured fellow who wants you to pick up his hospital tab.
First Greg Mankiw wrote a good piece in the New York Times about how there’s sometimes a hazy line between ordinary income and legitimate capital gains. Then Uwe Reinhardt wrote a puzzling (at least to me) followup in which he concluded that we might as well just give up and tax both at the same rate. I have some questions for Professor Reinhardt.
Professor Reinhardt goes on to instance the case of a person who buys a vacation home for $500,000 and sells it two years later for $1.5 million, suggesting that it would be unfair to let this person hang on to all of this gain, so it should therefore be taxed at the same rate as ordinary income. This brings me to the next questions:
Viagra analogies have been in the news a lot lately, both in connection with contraceptive coverage and in connection with state laws restricting abortion. I love good analogies and I hate bad ones, so I’d like to take a little time to sort out the bad from the good.
Because there are several scattered points to be made here, I’m putting them in sections and labeling them with Roman numerals, to make it easier for commenters to tell us just which section(s) they’re responding to.
My insurance policy covers Viagra. I would prefer that it didn’t. Given the costs and the probabilities, erectile dysfunction seems to me like a crazy thing to be insured against. There are a whole lot of other things I feel the same way about. I’d prefer not to be insured against losing my eyeglasses. On the other hand, I’m very glad to be insured against needing chemotherapy or kidney dialysis.
Joel Seligman, the president of the University of Rochester, has, in his words, exercised his right to express his views with a dissent from my recent posts about contraceptive subsidies.
Several news organizations have asked me for a statement. Here is what I sent them. (Below the fold is a copy of my email response to President Seligman.)
President Seligman says that the mission of the university is to promote the free exchange of ideas and lively debate, and I agree. That mission is undermined whenever a member of the academic community elevates raw self-interest over the exchange of ideas.
That’s what Sandra Fluke did. She observed that contraceptives are expensive, and therefore demanded that somebody other than herself and her fellow students pick up the tab. She didn’t even pretend to be interested in debating any of the serious issues raised by the question of when some of us should pick up the tab for others’ expenses.
Sometimes we should, sometimes we shouldn’t, and there’s a lot to be said, discussed, and debated about the particulars. An emotional appeal for one’s preferred outcome, ignoring all the substantive issues, is the
exact antithesis of the free exchange of ideas that President Seligman claims to endorse.
I’ve had three blog posts on this subject, here, here, and here. The commenters have offered many bright and lively arguments and observations, some of which have led me to modify some of my views.
This is a wonderful thing. It’s also the very opposite of Sandra Fluke’s approach, which amounts to a contemptuous dismissal of the very possibility of engaging these issues through intellectual discourse. I’d have expected a distinguished academic to feel the same way.
And now, my letter to President Seligman:
Over the last week, we’ve heard a lot from the people who (with a hat tip to one Joker), I now call “contraceptive sponges” — people who want others to pay for their contraception because — well, just because they don’t want to pay for it themselves.
I don’t think we need to take those people seriously. But others have taken the trouble to make actual arguments, both on this blog and elsewhere. Some but not all of those attempts deserve serious attention.
Rush Limbaugh is under fire for responding in trademark fashion to the congressional testimony of Georgetown law student Sandra Fluke, who wants you to pay for her contraception. If the rest of us are to share in the costs of Ms. Fluke’s sex life, says Rush, we should also share in the benefits, via the magic of online video. For this, Rush is accused of denying Ms. Fluke her due respect.
But while Ms. Fluke herself deserves the same basic respect we owe to any human being, her position — which is what’s at issue here — deserves none whatseover. It deserves only to be ridiculed, mocked and jeered. To treat it with respect would be a travesty. I expect there are respectable arguments for subsidizing contraception (though I am skeptical that there are arguments sufficiently respectable to win me over), but Ms. Fluke made no such argument. All she said, in effect, was that she and others want contraception and they don’t want to pay for it.
To his credit, Rush stepped in to provide the requisite mockery. To his far greater credit, he did so with a spot-on analogy: If I can reasonably be required to pay for someone else’s sex life (absent any argument about externalities or other market failures), then I can reasonably demand to share in the benefits. His dense and humorless critics notwithstanding, I am 99% sure that Rush doesn’t actually advocate mandatory on-line sex videos. What he advocates is logical consistency and an appreciation for ethical symmetry. So do I. Color me jealous for not having thought of this analogy myself.
Thirteen years ago, in 1999, when I wanted to illustrate the astonishing march of progress, my Exhibit A was a new $250 stereo system that held 60 CD’s and could play tracks in random order.
My new Exhibit A is the fact that it’s been only thirteen years since this was a great example.
That was in an essay focused mostly on Robert Frank’s hypothesis that people care largely about relative position as opposed to absolute wealth. I was reminded of that essay following yesterday’s post, and I managed to dig out a copy, which I’ve posted here. Despite the dated examples, I still think it’s pretty good.
When an ideologically diverse roomful of economists, upon hearing the announcement of a new presidential policy, bursts into unanimous laughter, you can be pretty sure the president is trying to pull a fast one.
A couple of days ago, I happened to arrive a little late for our department’s regular Friday 10AM bagel hour, where a heated discussion of the original contraception-for-all policy was in full swing. I was able to report that I’d just heard on the radio that the president was “backing off” by transferring the mandate from employers to insurers. Hilarity ensued.
Greg Mankiw’s four principles of tax reform are extraordinarily wise, and I think it’s fair to say that almost everyone who has thought hard about these issues will agree with everything he says.
I have only one quibble, and that’s that Greg is very sure we should eliminate the mortgage interest deduction in accordance with his first principle: “Broaden the Base and Lower Rates”. I think we should maybe keep it in accordance with his second principle: “Tax Consumption Rather than Income”. (Though I certainly agree that after the second principle has been implemented, it will be time for the mortgage interest deduction to go.)
How sad that so much wisdom is sure to go unheeded.
Here is how I answered that question in Jamaica:
(Slightly higher quality video here.)
Edited to add: There were apparently some problems with the video stalling somewhere around the one-hour mark (during the post-talk question period.) I believe this is fixed now.
A mere two days after I lavished praise on Alex Tabarrok’s new book, which (among many other things) makes an eloquent case for patent reform, the U.S. Patent Office has proved that nobody’s listening by issuing patent #8,082,523 to Apple, Incorporated for a “portable electronic device with graphical user interface supporting application switching”. The abstract, in its entirety, reads as follows:
In late 17th century England, there were no newspapers outside of London, and scarcely a printer outside of London, Cambridge and Oxford. The difficulty and expense of conveying large packets from place to place was so great that an extensive work took longer to reach Devonshire or Lancashire than it took, in Victorian times, to reach Kentucky. As a result, books and printed matter generally were largely unavailable outside of London — and London, for most rural Englishmen, might as well have been the moon.
I learned this from Macaulay’s History of England, which I just pulled up on my Kindle, which of course gives me instant — and searchable! — access to pretty much everything that’s ever been published. But the Kindle, and its brother e-readers, are more revolutionary than that. Not only do they give us easy access to existing literature; they call forth entirely new literary genres, such as the Kindle e-book, which brings to market extended essays that are too long to be magazine articles but too short to be traditional books — and are priced to sell.
All of which brings me to Alex Tabarrok’s Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast, which is both a product and a celebration of the innovation revolution, along with a recipe, or rather a set of recipes, for nurturing that revolution.
This is a great book. It’s fast-paced, fun to read, informative as hell, and it gets everything right. At first I wished I’d written it— until I realized I could never have written it half so well.
This post is a first attempt to rank the efficiency of the Republican candidates’ tax plans, concentrating on six dimensions:
1) The tax rate on wages and/or consumption. A wage tax and a consumption tax are pretty much interchangeable; you can tax the money as it comes in or you can tax it as it goes out. So I’m treating this as one category. The “right” level for this tax depends on your forecasts for future government spending.
2,3,4,5 and 6) The tax rates on dividends, interest, capital gains, corporate incomes and estates. I believe these tax rates should all be zero. That is not a statement about how progressive the tax system should be. A wage tax and/or a consumption tax can be as progressive (or regressive) as you like. It is instead a statement that while all taxes discourage both work and risk-taking, capital taxes have the added disadvantage that the discourage saving. This simple intuition is confirmed by much of the public finance literature of the past 25 years. (Here is a good example.)
My personal preference is for a system substantially less progressive than the one we’ve got, but for purposes of this exercise I won’t penalize candidates whose preferences differ from mine. For the record, Romney, Huntsman and Santorum are the three who (as far as I can tell) want to maintain substantial progressivity, with Romney, uniquely among the candidates, preferring even more progressivity than we currently have.
Here, then, is a chart, with candidates ranked roughly in order of their willingness to exempt capital income from taxation. I prepared this chart with a few quick Google searches (this is a blog post, not a journal article) and it probably contains errors. I’ll be glad for (documentable) corrections and will update the chart as they come in. Asterisks refer to further explanations, which you’ll find below the fold.
If we care about efficiency, we’re looking for zeroes in the last five columns. On the face of it, Johnson is the clear winner. But Cain’s 9/9/9 plan has two arguments in its favor that don’t appear on this chart. First of all, people are a lot less likely to bother evading one of three 9% taxes than a single 23% tax; therefore we’d have a lot fewer evasion problems under Cain than under Johnson. Second, it’s pretty easy to imagine Congress raising a 23% tax to 24% or 25% or 26%, but it’s a little harder to break the psychological barrier of single-digit tax rates, so Cain’s 9/9/9 might be more politically stable than Johnson’s 23. Therefore I’m calling this a tie between Johnson and Cain.
But the top six are all pretty good, except maybe for Paul, who hasn’t revealed his key number. Santorum is bad, Romney is atrocious, and Bachmann (who, as far as I can tell, has not bothered to release a tax plan) is an enigma.
Here’s the one passage the WSJ didn’t have room for; one day our children will look back in wonder on an age when the length of an argument was constrained by anything so archaic it could be measured in square inches:
I know you’ve heard it said that spending is good for the economy. That might be true during a recession, if you subscribe to a broadly Keynesian view of the world. But the death tax encourages overspending year in and year out, which is not a good thing no matter what your point of view.
Herewith my remarks about the estate tax (with particular reference to its effects on the very rich, and why we should care) to Congressional staffers, presented a couple of days ago under the auspices of the American Family Business Institute. Here is higher quality video. Here is the even higher quality YouTube version. Here is video of the entire event. I particularly recommend the first talk, by Stephen Entin.
Note that all of my remarks apply equally well to all forms of capital taxation. Entin did a better job of focusing on the particular shortcomings of the estate tax.
So Mitt Romney wants to exempt capital gains from taxation — but only for taxpayers who earn less than $200,000 a year. In Tuesday night’s debate, Newt Gingrich asked him (I’m paraphrasing) “Why the cap?”. Romney’s answer — that he’s looking out for the middle class because “the rich can take care of themselves” — was as incoherent as anything I’ve heard this election year.
I interpret Romney’s answer to mean that he wants to cut capital gains rates not on efficiency grounds, not on supply side grounds, and not on philosophical grounds, but on redistributionist grounds. Well, okay, I myself don’t think very much of redistribution as a primary driver of tax policy, but Romney and I can disagree on that one. But where the incoherence comes in is this: If your goal is to redistribute from the rich to the middle class, why on earth would you do it by cutting the capital gains tax, as opposed to lowering income tax rates in the middle and raising them at the top?
To put this another way: If you care about efficiency, you’ll want to cut the capital gains rate to zero for everyone. If you care about fairness, and if you believe fairness mitigates against double/triple/quadruple taxation, you’ll still want to cut the capital gains rate to zero for everyone. If you care about redistribution, you’ll want to juggle the tax brackets. But I can’t think of a single thing you could care about that would lead you to laser in on cutting capital gains rates for middle income taxpayers only.
Now it might be that somewhere in Romney’s 59 point economic plan there’s an answer to this. If so, Herman Cain was surely right when he intimated that Romney himself can’t be terribly familiar with the contents of that plan. Because, when asked a simple question about the justification, Romney wasn’t able to come anywhere close to making sense.
Paul Krugman’s latest venture into self-parody starts with a recent paper on the cost of air pollution, which finds that said costs are big and heavily concentrated in a few industries. Krugman then links to a New York Times article surveying Rick Perry’s past clashes with the EPA. With no further argument, he concludes that
Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.
Where to begin?
One thing I like about the study of economics is that it fosters compassion. When part of your job is to predict human behavior, you quickly learn the value of understanding other people’s problems. When the other part of your job is ferreting out the unseen global consequences of our choices, you’ve taken the first step toward caring about those consequences.
For example: Suppose a guy with no health insurance and no assets shows up at a hospital emergency room with an urgent life-threatening condition. Should you let him die? Ordinary compassion says no. The heightened compassion of the economist says, at the very least, maybe.
First, a policy of providing emergency health care to everyone is pretty much the same thing as a policy of providing emergency health insurance to everyone. It was specified here that this was a guy who didn’t want health insurance. So let’s recognize for starters that such a policy runs counter to — I am tempted to say runs roughshod over — the guy’s own revealed preference. It’s an odd sort of compassion that forces people to buy things they don’t want.
Now you might object that nobody’s forcing this guy to buy emergency health care; we’re trying to give him emergency health care. Not so fast. Here’s the first place where a little economic training goes to hone one’s sense of compassion: The emergency health insurance we’re foisting on this guy has a cost. We can spend that money on emergency rooms or we can spend it on a myriad of other things the guy might prefer. How is it compassionate to give him one thing when he prefers another?
This is particularly true if the guy happens to be very poor. Poor people have a lot of problems, and emergency health care is only one of them. They need better education, they need better transportation, and they need a little help buying groceries.
There is room for lots of debate and lots of disagreement about how much we as a society should be spending to help poor people. That’s not the issue here. The issue here is: Given that you’ve decided to spend an extra such-and-such many dollars a year helping poor people, why would you spend it in this particular way rather than one of the many other ways they could use it? For God’s sake, why not at least ask them if they’d rather have the cash?
Some commenters still seem confused about the locus of disagreement in this week’s back-and-forth with Paul Krugman. I post today not to beat a dead horse, but to clarify the issues for those who are interested in understanding them. Please keep any discussion both civil and on-topic. I’ve numbered the points below for easy reference.